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Tax Avoidance vs Tax Evasion

August 24, 2020

Tax avoidance Canada and beyond are popular topics that cause a lot of people concern. Find out the difference between tax avoidance and tax evasion.

What’s the Difference Between Tax Avoidance and Tax Evasion?

The Canada Revenue Agency (CRA) expects people to file their tax returns every year and to pay any tax debt that they owe. Failing to do so can get you into some serious trouble. When it comes to tax evasion and tax avoidance Canada has several laws and policies in place. Firstly, and most importantly, is that tax evasion is illegal and tax evaders can face criminal prosecution.

Tax evasion is deliberately ignoring a part of tax law. Examples include misrepresenting your income, claiming expenses that are non-deductible or overstated, or refusing to comply with reporting requirements. Tax evasion also includes knowingly providing a false statement on a tax return as well as destroying, altering or disposing of books or records.

While jail time for tax evasion in Canada is relatively rare, this doesn’t mean that the CRA will let you off the hook. That said, in most cases, the CRA simply wants the money that is owed to it. The CRA has very strong collection powers and can take broad actions to collect tax debt.

Tax evasion is often confused with tax avoidance. Canada Revenue Agency states that, while tax avoidance is technically within the letter of the law, the actions often “contravene the object and spirit of the law.” An example of tax avoidance is a situation where a person owns a business and employs his or her spouse. If this person overpays their spouse in order to lower their own taxable income, it can be considered tax avoidance.

Many forms of tax avoidance are completely legitimate, however. For example, contributing to an RRSP in order to reduce your taxable income is a form of tax avoidance, but one that is not just acceptable but actually encouraged. However, the CRA focuses on tax avoidance tactics that violate “the spirit of the law” when they are investigating situations.

It is easy to confuse tax evasion with tax avoidance. Canada Revenue Agency can usually tell the difference between the two. For example, if it believes that you misrepresented your income or expenses, but that it was an honest mistake and not a deliberate attempt to violate tax law, it will generally not pursue tax evasion charges. Tax dodging typically needs to be deliberate. That said, these matters are often open to interpretation so you may need to speak with a tax professional in such situations.

Tax Avoidance Canada and the Voluntary Disclosure Program

Rather than deal with possible tax avoidance Canada Revenue Agency has made it possible to correct previously filed returns or return one that you should have filed. This program is called the Voluntary Disclosure Program. The program is designed as a “second chance” to help people who would otherwise be penalized for incorrect returns or returns that have not been filed. It’s important to note that the disclosure must be voluntary. If the CRA has already contacted you or taken any compliance action against you, you would not be eligible for this program.

Dealing with Tax Avoidance in Canada

If you have not filed your tax returns in some years or if you owe tax debt that you have not repaid, know that the CRA will not ignore these situations forever. Perhaps they have not yet contacted you (in which case, you may want to consider the Voluntary Disclosure Program noted above) but that does not mean that they won’t. They definitely will at some point.

Tax dodging, tax evasion and tax avoidance will be noticed by the CRA and the agency will use its considerable powers to collect what it is owed. This can potentially include seizing your assets, freezing your bank account, garnishing your wages, and taking legal action against you. Obviously, you do not want any of those situations to occur.

If you owe tax debt, due to tax evasion or tax avoidance, Canada Revenue Agency will be very tough with you. That is why it is important to speak with a qualified professional about your situation. Speaking with someone who is experienced at dealing with the CRA can greatly help you deal with your tax debt.